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Causal versus Consequential Motives in Mental Models of Agent Social and Economic Action: Experiments, and the Neoclassical Diversion in Economics

Vernon Smith

Kyklos, 2020, vol. 73, issue 3, 341-370

Abstract: Since the neoclassical revolution of the 1870s, reasoning and analysis in economic theory has been dominated by utility theory, in which: Action implies Outcome implies Utility. I describe three prominent and unexpected failures of this utilitarian framework to predict the replicable outcomes of experiments. First, in supply and demand experiments for non‐durables the predicted equilibrium obtains, but under conditions violating those thought necessary: complete information, large numbers and price‐taking behavior. The failure is in not accounting for the weak conditions under which equilibrium is actually attained. Second, in asset markets it is thought that price bubbles cannot rationally occur under complete common information on fundamental value. Replicable experiments consistently yield price bubbles in violation of this prediction. Third, in two‐person trust and ultimatum games, equilibrium predicted outcomes failed decisively and massively. The observed failures stem from modelling only the outcome consequences of actions, not “the impulses from which action proceeds.” Utility theory rigidly binds the origins of action to their outcome value, thereby trumping alternative mental models of the actor.

Date: 2020
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https://doi.org/10.1111/kykl.12246

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Working Paper: Causal versus Consequential Motives in Mental Models of Agent Social and Economic Action: Experiments, and the Neoclassical Diversion in Economics (2018) Downloads
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